Layer 2 History: The Rise of State Channels

Author: Logic; Source: LXDAO

MyFirstLayer2 is sponsored and supported by the Ethereum Foundation and is an educational project of LXDAO’s “My First” series. We hope to popularize Layer 2 knowledge to Web3 users and start using Layer 2 safely in the most simple and easy-to-understand way through text + image + animation + interaction.

In the previous article, we explored the origins and fundamentals of Layer 2 technology, which solves a series of challenges posed by the “impossible triangle” for blockchains. However, the maturity of every technology is inseparable from continuous exploration and trial and error. Today, we’re going to dive into the history of Layer 2 and see what important milestones Layer 2 has experienced along the way.

Let’s start with the example of Alice. Let’s say Alice spends regularly at a coffee shop, and she pays a $0.5 processing fee for each $5 cup of coffee. If Alice and the coffee shop can reach an agreement, they only need to give the coffee shop a signed IOU for each purchase, and then after a period of time, the coffee shop will aggregate all the IOUs and settle Alice at one time, which will greatly reduce the transaction cost and benefit both parties. This simple idea is the principle of the state channel, the earliest layer 2 network.

The state channel uses multi-signature technology, which allows two participants to make multiple small transfers in an internal channel, which is only recorded on the blockchain when the channel is opened and closed. Not only does this dramatically increase transaction speed and reduce costs, but it also provides foundational technical support for Bitcoin’s Lightning Network and Ethereum’s Raiden Network.

In a nutshell, the operation of a state channel includes:

1. Establish a private channel: Allow participants to transact outside the blockchain.

2. Fund locking: In order to ensure the security of off-chain transactions, channel participants need to lock a certain amount of funds on the blockchain.

3. Off-chain transactions: Participants make multiple transactions in a private channel without having to record them on the blockchain each time.

4. Reduce transaction costs and time: Only when the channel is opened and closed, it needs to be recorded on the blockchain, which greatly saves transaction costs and time.

5. Maintain the security and integrity of the blockchain: The security and integrity of the blockchain are ensured through the locking of funds on the blockchain and the final settlement.

State Channel

Raiden is an excellent example of state channel technology, which not only supports fast transfers within the channel, but also allows users to send funds to other accounts that are not directly connected through multi-node interlays.

Thunderbolt Network

However, state channel technology also has its limitations. For example, it requires centralized nodes to stake funds and process off-chain transactions. And, while state channels are suitable for simple transfer transactions, they are not powerful for more complex transaction scenarios such as decentralized finance (DeFi). This leads us to the next two scenarios we’ll explore: sidechains and plasma.

In the following content, we will take a closer look at sidechain and plasma solutions, respectively, and how they can solve more scenarios that state channels cannot cover, and promote the development of Layer 2 technology.